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Feds May Break Rules on GM Retiree Pension Plan

Financial engineering makes big bet on future stock value.

by on Sep.18, 2009

Can the VEBA stay afloat on GM stock?

Can the VEBA stay afloat on GM stock?

The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) this morning announced a a request for an exemption that — if granted — would allow the General Motors Company to transfer company securities including common stock, preferred stock and a $2.5 billion promissory note, to the revised Voluntary Employee Beneficiary Association (VEBA) health plan established for the company’s retirees.

GM Company is the successor company that purchased substantially all of the assets of General Motors Corporation, which filed for bankruptcy on June 1, 2009, and emerged reorganized in July.

This retiree health plan will cover approximately 700,000 retirees and dependents when it becomes effective on December 31 of this year.

The idea of the VEBA has been around for years, but as adopted by GM, Ford Motor and Chrysler it was a piece of financial engineering that removed obligations from their balance sheets by shifting the responsibility for retiree health care to an independent trust, which in theory will have its own income stream. It lowered automaker borrowing costs for a time. However, the funding never appeared in anywhere near the amounts promised to the UAW.

Under the proposal negotiated as part of  the bankruptcy, GM would be allowed replace more than half of the contributions that it owed to the VEBA with 20% common stock, and the remainder of the contributions will be replaced with a $2.5 billion bond and $6.5 billion in preferred stock. These changes will save GM billions of dollars. It also would transfer the UAW assets of its old VEBA to new one.

“They also greatly increase the risks being assumed by retirees. Depending on the value of the company’s stock, the trustees of the retiree health-care trust fund may have to make further reductions in benefits in the coming years,” the UAW said at the time.

It is widely expected that GM, now largely held in private by U.S. taxpayers, will attempt to go public as soon as next year.